How The $1 Trillion Green Bond Market Works

Summary

Rob Fernandez discusses the growing green bond market, emphasizing the importance of verifying the environmental impact of investments. Green bonds, which are earmarked for eco-friendly projects, are part of a larger trend including social and sustainability bonds, with a projected $650 billion issuance in 2021. The script highlights the voluntary nature of green bond commitments, the role of external reviews in enhancing credibility, and the potential for new types of bonds focused on specific sustainability goals.

Takeaways

• 🌿 Rob Fernandez emphasizes that not all 'green' bonds are created equal; he scrutinizes the true environmental impact before investing for clients.
• 🌍 Green bonds are gaining popularity as investors look to combat climate change, with major corporations and governments participating in the market.
• 📈 The green bond market is expected to surpass $650 billion in 2021, reflecting significant growth and a substantial portion of the global bond market.
• 💼 The structure of green bonds is similar to traditional bonds, with the key difference being the commitment to use funds for environmentally friendly projects.
• 🏢 Companies like Apple and Pepsi, as well as organizations like the New York MTA, are issuing green bonds to finance eco-friendly initiatives.
• 🔍 The green bond market includes green, social, and sustainability bonds, with green bonds accounting for the largest share in issuance.
• 🏦 Banks, corporations, and governments are all active issuers in the green bond market, with a focus on investment-grade bonds to ensure reliability.
• 👵 Large institutional investors, such as pension funds and asset managers, are driving demand for green investments, with retail investors also getting opportunities.
• 📋 The green bond principles set guidelines for issuers, including use of proceeds, project selection, management, and reporting, though they are voluntary.
• 👁️ External reviews and certifications provide assurance to investors about the environmental integrity of green bonds, similar to eco-labels on consumer products.
• 🔑 The future of the green bond market is likely to include innovation in sustainability-linked bonds and other specialized bonds targeting specific environmental or social goals.

Q & A

What does Rob Fernandez consider when analyzing potential investments for clients?

Rob Fernandez looks at what it means for an investment to be green and does not simply buy green labelled bonds just because they are labelled as such.

Why are more investors interested in green bonds?

Investors are interested in green bonds as they want to put their money to work in a way that helps combat the climate crisis.

What is the significance of environmental, social, and governance (ESG) issues in the context of the script?

ESG issues are significant because they matter to investors and are becoming a key consideration in the selection of bonds, with big household names and governments getting involved in this space.

What is the projected bond issuance for green bonds in 2021?

The bond issuance for green bonds in 2021 is projected to top $650 billion, which is about 8 to 10% of all bonds being issued around the world.

How do traditional bonds differ from green bonds?

Traditional bonds are IOUs used by issuers to raise money for various purposes, while green bonds are earmarked for projects that are positive for the environment, with the issuer making a non-binding commitment to use the proceeds for environmentally-friendly projects.

What are the three categories of sustainable bonds?

The three categories of sustainable bonds are Green, Social, and Sustainability bonds, each used for projects that meet specific environmental or social standards.

What is the expected issuance for green bonds in 2021?

The expected issuance for green bonds in 2021 is $375 billion.

Who are the typical buyers of green bonds?

The typical buyers of green bonds are big pensions, asset managers, and retail investors who are putting pressure on the need for more green investments.

What are the core requirements that green bonds must meet according to the green bond principles?

The core requirements include use of proceeds for green projects, process for project valuation and selection, management of proceeds, and reporting on the use of funds and their environmental impact.

What is the role of external reviews and certifications in the green bond market?

External reviews and certifications provide an opinion on the credentials of the offering and whether it aligns with the green bond principles, offering assurance to investors that due diligence has been done.

What is the potential future for the sustainable green bond market according to the script?

The market is expected to continue to grow, with the inclusion of sustainability-linked loans or bonds and the rise of different labeled products like blue bonds or gender bonds, indicating a diversification and expansion in the types of projects financed.

Outlines

00:00

🌱 Green Investment Analysis

Rob Fernandez discusses the importance of scrutinizing green bonds for clients, emphasizing that not all 'green' labeled bonds are created equal. He highlights the growing interest in combating climate change through investment and the significant role green bonds play in this financing. Fernandez also mentions the involvement of major corporations and governments in the green bond market, which is expected to reach $650 billion in 2021, representing a significant portion of the global bond issuance.

49:58

💼 Understanding Green Bonds

This paragraph delves into the structure and purpose of green bonds, which are fundamentally different from traditional bonds due to their earmarked use for environmentally beneficial projects. The issuer makes a voluntary commitment to allocate the proceeds to specific green projects, such as renewable energy or clean transportation. The market for sustainable bonds is expanding, with green, social, and sustainability bonds contributing to a diverse mix of investment opportunities. The paragraph also touches on the growth of the market, the types of issuers involved, and the potential for retail investors to participate in green bond investments.

55:00

📊 Green Bond Accountability and Market Evolution

Accountability in the green bond market is primarily driven by best practice documents like the Green Bond Principles, which outline core requirements for issuers. These include use of proceeds, process for project valuation, management of proceeds, and reporting. External reviews and certifications provide an additional layer of assurance for investors. The market is evolving with the introduction of sustainability-linked loans and bonds, which tie interest rates to the achievement of sustainability targets. There is also a rise in different types of bonds, such as blue bonds for marine projects and gender bonds for promoting diversity, indicating a broadening scope of what constitutes sustainable financing.

Keywords

💡Green Bonds

Green bonds are debt instruments used to finance projects with environmental benefits. They are a key focus in the video, illustrating how capital is being directed towards combating the climate crisis. The script mentions that green bonds are 'the poster child of this kind of financing' and that they are earmarked for projects that are positive for the environment, such as renewable energy and clean transportation.

💡Environmental, Social, and Governance (ESG) Issues

ESG issues refer to the three central factors in measuring the sustainability and societal impact of an investment in a company or business model. The video script highlights the importance of ESG in the context of green bonds, stating that they 'are here and it matters' and are a growing consideration for investors.

💡Sustainability-Linked Bonds

Sustainability-linked bonds are a type of debt instrument where the interest rate is tied to the achievement of certain sustainability targets. The script discusses the evolution of the market to include these types of bonds, which have the potential to impose a financial penalty if the issuer does not meet their sustainability goals.

💡Investment Grade

Investment grade is a rating given by independent rating agencies to bonds that are considered most likely to repay their debts. The script notes that most issuances of green bonds have been considered investment grade, indicating a lower risk for investors.

💡High Yield Bonds

High yield bonds, also known as junk bonds, are bonds that are rated below investment grade and are considered riskier. The video script contrasts these with investment grade bonds, indicating a different segment of the bond market that may also be involved in green financing.

💡Green Bond Principles

The Green Bond Principles are a set of guidelines established by the International Capital Market Association to promote transparency and integrity in the green bond market. The script explains that these principles include four core requirements for green bonds, such as the use of proceeds for green projects and reporting on the environmental impact.

💡Second Party Opinions

Second party opinions are external reviews provided by a credible third party to assess the green credentials of a bond issuance. The script mentions that many issuers seek these opinions to add credibility to their green bonds, which investors rely on for assurance.

💡Taxonomy

A taxonomy in the context of green bonds is a system of classification that helps define what projects qualify as 'green'. The script refers to the taxonomy as a 'dictionary or catalog of what we mean by green', which is crucial for determining the use of proceeds from green bonds.

💡Sustainable Bonds

Sustainable bonds encompass a broader category than just green bonds, including social bonds and sustainability bonds. The script explains that sustainable bonds are growing in the market, with green, social, and sustainability bonds expected to reach $650 billion in issuance in 2021.

💡Blue Bonds

Blue bonds are a specific type of bond designed to finance marine or ocean-related projects. The script mentions blue bonds as an emerging category within the sustainable bond market, indicating a diversification of thematic bonds beyond traditional green bonds.

💡Gender Bonds

Gender bonds are a newer category of bonds aimed at promoting gender diversity in the workplace or on corporate boards. The script briefly mentions gender bonds as an example of how the bond market is evolving to address various social and environmental issues.

Highlights

Rob Fernandez emphasizes the importance of analyzing what makes an investment truly 'green', rather than just buying green-labelled bonds.

Increasing interest from investors in combating the climate crisis through green bonds, which are becoming a significant part of the bond market.

Environmental, social, and governance (ESG) issues are critical in the current investment landscape, with major corporations and governments participating.

Green bond issuance is projected to exceed $650 billion in 2021, representing a significant portion of global bond issuance.

Green bonds are distinguished by their financing of environmentally positive projects, with a voluntary commitment from issuers.

The structure of green bonds is similar to traditional bonds, but with an added green commitment, highlighting the non-binding nature of their environmental focus.

The sustainable bond market includes green, social, and sustainability bonds, with a combined issuance expected to reach $650 billion in 2021.

Social bonds are earmarked for projects like affordable housing and microfinance, while sustainability bonds meet both green and social standards.

Green bonds represent the largest segment of sustainable bonds, with an expected issuance of $375 billion in 2021.

The issuance of green bonds has grown to over $1 trillion USD, indicating a substantial and diverse market involving banks, corporations, and governments.

Most green bond issuances are considered investment grade, suggesting a lower risk profile for investors.

Retail investors are increasingly able to participate in green bond investments, particularly through municipal green bonds.

Accountability in the green bond market is primarily driven by best practice documents and voluntary compliance, rather than strict regulation.

The Green Bond Principles outline four core requirements for green bonds, including the use of proceeds, process for project evaluation, management of proceeds, and reporting.

Second party opinions and external reviews are becoming common in the green bond market, providing investors with additional assurance of a bond's green credentials.

The green bond market is evolving to include sustainability-linked loans and bonds, where interest rates are tied to the achievement of sustainability targets.

The emergence of new types of bonds, such as blue bonds for marine projects and gender bonds for promoting diversity, indicates a broadening of the sustainable finance market.

The potential use of green bonds to support infrastructure spending from the Biden administration's plan highlights their role in addressing climate impacts.

The green bond market is expected to continue growing, with a focus on evolving standards and the introduction of new types of bonds to meet diverse sustainability goals.

Transcripts

When Rob Fernandez analyzes potential investments for

clients, he looks at what exactly it means for an

investment to be green.

We won't just buy a green labelled bond for clients just

because it says it's green.

More and more investors are interested in putting their

money to work in a way that will help combat the climate crisis.

And green bonds are the poster child of this kind of financing.

Environmental, social, and governance issues are here and

it matters.

And some big household names are getting into this space, like

Apple, Pepsi, the New York MTA. Plus, a handful of massive

banks. Not to mention governments around the world,

like China, Russia, the EU and and more. This kind of bond

issuance may top $650 billion in 2021. That's about eight to 10%

of all the bonds being issued around the world.

They're a growing part of the marketplace. They're going to

continue to grow. And I think that's going to be a major part

of the bond market.

So, there's a whole new bond market within the bond market.

Bonds as we know them work like this: An issuer, most often a

company or a government, raises money by offering bonds to

investors. They're basically IOUs, an exchange for getting

money up front, when you sell the bond, you pay the bond

holder back over a certain amount of time with interest.

Issuers use these bonds to raise money to invest in their

business, employees, infrastructure, anything you

name it.But green bonds are different.

The fundamental differences that it's about what it's financing,

first and foremost.

Money raised from these are earmarked for projects that are

positive for the environment.

The one key difference is that the issuer makes a non-binding

voluntary commitment to earmark the proceeds and use them for

specific environmentally-friendly

projects. So, it could be renewable energy, energy

efficient buildings, clean transportation, clean water, but

from a structure standpoint, they tend to be the same as the

traditional bonds that issuer would bring to market, minus the

green commitment.

The market here is bigger than just green bonds.

So, we saw last year about $490 billion of green, social and

sustainability bonds combined. This year, we're expecting about

$650 billion across those three categories.

And that's up 32% from 2020.

So, it's really it just keeps going.

Sustainable bonds break out into three categories: Green, social,

and sustainability.

Social bonds would be used primarily for social purposes.

It could be affordable housing, or micro finance.

And the sustainability bond category here basically means a

bond meets both green and social standards of issuance. The

biggest slice of the pie goes to green bonds with an expected

$375 billion of issuance in 2021.

In 2020, green bonds reached about $1 trillion USD at the end

of 2019.

And issuance is growing.

So it's a huge diverse mix. Banks, corporates and

governments. Anyone issuing or the ability to issue a bond is

issuing, especially when they have the eligible assets to do

so.

Most issuances so far have been considered investment grade.

That means independent rating agencies say those issuers are

most likely to repay their debts. The other side of the

bond market is more risky, often called high yield bonds or even

junk bonds. As for the buyers...

The buyers are the big pensions, the big asset managers. They are

the guys that really are putting pressure around the need for

more green investments. Retail investors are having a chance to

invest in muni green bonds, and that's not a common practice

that's happening globally.

I think that's going to be a major part of the bond market

where the retail investor can get some participation in that.

When it comes to accountability...

To date, it's been largely, you know, sort of a best practice,

document-driven market. But at this point, it's been a

regulatory light market for the most part. The green bond

principles, which are sort of a best practice document that was

put out by the International Capital Market Association.

For a green labeled bond, if the issuer is complying with the

principles, the green bond principles, then there's certain

parameters, certain guidelines they have to follow.

There's four core requirements that these bonds must meet, but

it's a non-binding voluntary commitment. First is use of

proceeds. It's basically the legal document that details how

the money raised will be used for green projects. And to

determine what's green, there's what's called a taxonomy.

The taxonomy's main objective is to help set the course on what

is green. You know, think of it as a dictionary or catalog of

what we mean by green.

The other core components include process for project

valuation and selection, management of proceeds, and

reporting. They're all interconnected. And essentially,

it advises issuers to keep up-to-date information on how

the money is being used and the project's environmental impact.

How are you going to manage the proceeds during the time of the

bond, you're going to use a tracking system or you're going

to ring-fence it, the proceeds? And of course, how will you

report on those is really the fundamentals on what the green

bond principles is trying to lay out.

All of this can be subject to second party opinions, external

reviews, and even verifications and certifications.

It's not one of the four key principles, but it's like it's

essentially a fifth and many issuers are doing it. And then

they'll oftentimes will bring an external reviewer in to provide

an opinion on the credentials of the offering and whether it

aligns with either the green bond principles.

And that's what investors actually rely on. They rely on

that verification that second party opinion, or certification

of the green bond.

Think of those stamps you may see on coffee or paper towels,

even ice cream, that are meant to signify to buyers that

whatever they're buying is ethical or sustainable.

When we pick up a product in the supermarket, and we make a

decision on whether we buy the same product, but of a different

brand, if one has been, you know, stamped by WWF or

Rainforest Alliance, we have a tendency to go, "I trust that

label." It is a marketing component that comes with an

assurance behind it that you can buy this product and know that

the due diligence has been done.

But issuers don't have to do this.

Well, investors in the U.S. market are gonna buy muni bonds,

whether they're green, or whether they're purple, or

whether they're pink. There is no guarantee what is being put

out actually is green.

Some muni bonds are getting that external review.

And so for example, like the New York MTA, they've issued green

bonds, and they've received a second party opinion.

They definitely wanted that extra credibility that it was

somebody else credible, authoritative voice saying that

this was green, not the MTA.

If the issuer decides to use all the money raised for something

else, there's no regulation in place to punish them.

Typically, we haven't seen sort of legal repercussions and bond

documents that say if the funds aren't used for specific

purposes, that it will be an event of default. So it's really

been, you know, what sort of the reputational impact there could

be.

It's why the rules of the game becomes so important and making

sure we have the right standard frameworks and verifications

happening.

Yeah, what's next for the sustainable green bond market? I

do think we're gonna see continue to issuance.

Plus, the market is evolving to include sustainability-linked

loans or bonds.

The interest rate is typically tied to the achievement of some

sort of sustainability target, the coupon could step up by 25

basis points, for example, if a targets not hit some point into

into the life of the bond.

It's almost as they're setting themselves up that they could

have a financial penalty, should they not achieve their goals.

So, there's only been about $15 to $20 billion of

sustainability-linked bonds to date, but the vast majority of

that has been in the last six months or so. So, a lot of

growth potential there, just still very early stages to kind

of size the market.

And we'll also see a rise in different labeled products

Like blue bonds or gender bonds

Blue bonds have been issued as a way to look at marine projects

or ocean or water projects. We've seen some gender bonds.

This is really looking at diversifying gender on boards or

in the workplace.

There was a big U.S. Bank last year that came to market with a

social bond they called a racial equity bond. You could see the

green, you know, the green label being used by issuers to support

the infrastructure spending from the Biden administration plan.

And therefore green bonds serves as a extremely useful tool in

moving large amounts of capital towards those projects, and

encourages, obviously this need to think about building out the

infrastructure that is going to prepare the United States for

the impacts of climate.

The only thing that's constant is change. And, so when you se

this new wave of green bonds and these topics arise on th

environmental social governanc side, it's great. It's great t

see that the growth is there an people are actually payin

attention to these details